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The Effects of NAFTA

Updated on November 9, 2017

What is NAFTA?

The North American Free Trade Agreement (NAFTA), established in 1994, is a negotiation between the United States, Canada and Mexico. NAFTA stemmed from the United States-Canada Free Trade Agreement (1989) and negotiations between the U.S. and Mexico (1991), in which Canada joined (“North American Free Trade Agreement”). By 2008, most tariffs and barriers on trade among the three countries were eliminated due to NAFTA (McBride & Sergie, 2017). In addition to eliminating trade barriers, NAFTA triggered investment in foreign economies and the movement of production factories (Scott, 2003). NAFTA has had controversial impacts on the economies of the countries involved in the agreement.

How has the United States been effected?

NAFTA was signed into effect based on the premise that an increase in trade, specifically exports, would create more jobs in the United States workforce. As former President George Bush stated “…trade means jobs. More trade means higher incomes for American workers” (Scott, 2003). In reality, the economic impact NAFTA has on the U.S. economy must consider the “trade balance”, which is the difference between exports and imports. Just as an increase in exports created jobs for Americans, an increase in imports led to job loss; The United States importing goods leads to job displacement, as these goods would otherwise be produced in the U.S. (Scott, 2003). Ultimately, the trade deficit created by a larger volume of imports than exports has led to job loss across America. Despite the positive statements made about NAFTA leading up to its implication, NAFTA was a component that lead to the displacement of production that supported closed to 900k American workers. Most of these jobs were high-wage positions in the manufacturing industry (Scott, 2003).

Although there are some clear downfalls to the effects NAFTA has had on the United States, the agreement has had its benefits. Following the implication of NAFTA, trade among the United States and the North American countries that border it has more than tripled, with Canada and Mexico being the two largest destinations for exports from the U.S. (McBride & Sergie, 2017). Additionally, consumers in the U.S. benefit, as import competition has led to higher quality good and lower costs (McBride & Sergie, 2017). Economist Gordon Hanson also argues that NAFTA has helped the auto industry in the U.S. by allowing it to continue competing with China. Through the agreement’s “development of cross-border supply chains”, the United States has experienced higher productivity and lower costs (McBride & Sergie, 2017).Though some manufacturing jobs were displaced to Mexico, there would have been even more job shed had the auto industry in the United States been lost altogether.

Has Mexico benefited from the agreement?

In Mexico, farm exports to the United States have tripled since the agreement was implemented (McBride & Sergie, 2017). Displacement of manufacturing in the United States also created hundreds of thousands of jobs Mexico. It was also seen that NAFTA resulted in higher productivity and lower consumer prices (McBride & Sergie, 2017). Though Mexico has experienced the benefit of NAFTA, the “promises” of rapid economic growth and higher wages that the agreement was supposed to bring have come up short. Between the implementation of NAFTA and 2013, the economy had only grown at an average of 1.3% per year. In addition, Mexican unemployment rose and poverty has remained at the same levels since 1994 (McBride & Sergie, 2017). Overall, more than one factor contributes to a nation’s economy, and NAFTA does not seem to have hurt Mexico’s position.

Where does Canada stand?

In the years since NAFTA, Canada has experienced an increase in cross-border investments, with U.S. and Mexican investments in Canada having tripled (McBride & Sergie, 2017). In 1989, The Canada-US Free Trade Agreement (CUSFTA) initiated free trade among the two countries. Despite CUSFTA being instrumental in supporting the economy, as the U.S.is Canada’s largest trading partner, Canada still saw an increase in exports to the U.S.after NAFTA was implemented (McBride & Sergie, 2017). Additionally, Canadian agricultural exports to NAFTA partners have tripled since 1994 (McBride & Sergie, 2017).Ultimately, Canada faced no direct negative effects from its participation in NAFTA.

What does Trump mean for NAFTA?

The United States, Mexico and Canada are currently facing renegotiation of NAFTA due to the Trump Administration seeking changes. Among the goals of President Trump is to raise the “rules of origin”, which is “the level of good that must be produced in North America” (Swanson, 2017); The United States also wants to set a new threshold for the level of goods that must be produced in the US. By doing so, Trump hopes to create more jobs in the U.S. manufacturing industry. Raising labor standards is also a topic of renegotiations, as Mexican employees would gain the ability to form unions and receive higher pay (Swanson, 2017). Only the future will tell what NAFTA renegotiations mean for the countries involved.

References

McBride, J., & Sergie, M. A. (2017, October 4). NAFTA's Economic Impact. Retrieved November 09, 2017, from http://www.cfr.org/backgrounder/naftas-economic-impact

North American Free Trade Agreement (NAFTA). (n.d.). Retrieved November 09, 2017, from https://ustr.gov/trade-agreements/free-trade-agreements/north-american-free-trade-agreement-nafta

Scott, R. E. (2003, November 17). The high price of 'free' trade: NAFTA’s failure has cost the United States jobs across the nation. Retrieved November 09, 2017, from http://www.epi.org/publication/briefingpapers_bp147/

Swanson, A. (2017, September 28). How the Trump Administration Is Doing Renegotiating Nafta. Retrieved November 09, 2017, from https://www.nytimes.com/2017/09/28/business/how-the-trump-administration-is-doing-renegotiating-nafta.html


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